The Free Market and Its Assumptions The free market gives us our abundance from self-interest. Adam Smith: “It’s not from the benevolence of the butcher, the brewer or the baker that we get our dinner,” it’s the Invisible Hand of the free market that does it. Adam Smith was a religious man and marveled that people serving their own self-interest end up serving others. The market channels self-interest into a kind of divinely ordained altruism.Milton Friedman sought to show how the free market works best. We can summarize economic theory and his views by saying that the free market works without government if there is perfect information, perfect competition and if there are no externalities and public goods. Specifically: 1. There is a free flow of perfect information. That means symmetry between buyer and seller so that they can arrive at the right price. If the seller knows more than the buyer, the market doesn't work properly because the seller can overcharge. 2. There is full orperfect competition.With perfect information and perfect competition, prices will be driven down to the cost of production, to the benefit of the consumer. That means no monopoly, which can extract extra profits even if there is perfect information. It also means no oligopoly - the products must be commodities, undifferentiated. NOTE: What is "perfect" about the free market is perfect for the consumer. But it is really bad news for business. Selling a commodity means death for the company. Executives are constantly trying both to be better informed than their adversaries, their competitors, and to differentiate their product so that they can sell more at a higher price. Smith knew that and observed that business leaders will do is try to fix prices, which is against U.S. law. Business executives are also looking for an edge, an inside track. That could entail lobbying, 3.No externalities. An externality is something the company does apart from providing goods and services that affects neighbors. The baker produces a nice smell for the area and provides heat for neighboring homes. A beekeeper helps maintain bee colonies that pollinate the plants of neighbors. These are good things. But a bee can also sting. And a brewery business upstream from another business may pollute the water. Externalities are ordinarily believed to require a government to lay down the law. 4.There are nopublic goods. The free market assumes everything is owned by someone. The Soviets had a proverb: “What is owned by everone is owned by no one.” When property is owned in common, the free market doesn’t work well. Common pasture gets overgrazed. It’s called the tragedy of the commons. The Role of Government Milton Friedman and Adam Smith understood that someone has to set the rules of the game, for business and the society, to make sure there is a level playing field. But then, they said, government should get out of the way. Government should be as small as possible.
The Reality of Government Government doesn't always do what needs to be done on the environmental and social fronts because of (1) lobbying, (2) corruption and poverty in developing countries, so consumers and investors and employees need to prod companies to do it. Often what multinationals do as part of their CSR programs is to comply with environmental and labor laws on the books in developing countries that are not enforced. CSR
There’s a discussion of definitions of CSR here. The main ideas are:
1. Actively serving stakeholders (community, customers, suppliers, employees), not just shareholders. 2. Going beyond compliance with law (which is ordinarily assumed), toward voluntary standards that exceed legal minimums. 3. At an advanced level, compliance wth voluntary CSR standards set by multi-stakeholder initiatives and monitored by accredited certification bodies.
CSR has many side issues. Some take the view that certain kinds of business are immoral – selling cigarettes, for example, or manufacturing weapons. Others distinguish between promoting cigarettes and supplying them to people who are already addicated. On the military contracting side, they can argue that protecting one’s country is the right thing to do, our duty, whereas selling arms to other countries is irresponsible. Is CSR a form of cultural imperialism? A relativist argues that no morality is superior, that what is right is what one's peers believe to be right.
Ethics is a luxury good - it costs extra and is therefore a brand input. The mass-market product is sold on the basis of price; it is a commodity. Luxury goods can be priced higher. CSR becomes an ingredient in the product that adds value (and costs something). Buying Stonyfield Yogurt is buying into the family farm with no bovine hormones. Ben & Jerry's and the Body Shop are selling peace and protecting the Rainforest. Chiquita is selling environmental and workplace CSR as an ingredient commanding a higher price. Eileen Fisher is selling attention to the needs of the upscale working mother.
The surprising new development is that on the environmental front a mass marketer - Wal-Mart - has found that attention to certain environmental issues in the name of CSR can actually save money.